Those of us in the student housing profession have been facing complicated challenges because of the COVID-19 pandemic. With campus closures and the rapid pivot from face-to-face to remote learning, students were required to vacate campus housing communities to comply with directives coming from various state governments and associated educational agencies. As a result, multitudes of institutions also refunded various student fees, including housing and dining charges. This posed a myriad of systemic implications for student housing public-private partnerships (P3) given the complexity of the business relationships that exist with this type of arrangement. While universities with wholly owned housing portfolios will certainly suffer the effects of refunding millions into tens of millions of dollars for housing fees, universities with P3’s, on the other hand, will face unique financial and operational challenges.
Because of the various entities that are involved in a student housing P3, the effects will not simply be confined to a campus to manage. Between ownership entities, operating firms, investors, underwriters, and various campus departments, there will plenty of shared distress to go around. In some cases, the host university has picked up the bill for refunds given to students mandated to vacate while in other cases the project itself may dip into their own reserves to cover this.
S&P Global and Moody’s Investors Service have already negatively downgraded the outlook for multiple privatized student housing projects given the precarious situation that colleges and universities will face with the challenges of paying debt service. The uncertainty with how the 2020-21 academic year will play out adds to the situation as institutions that decide to go to fully remote will quickly put P3 campus projects in financial risk. Financial stress will still occur even if there are plans to open, but with decreased occupancy to conform to social distancing standards. Given the partnership dynamics that exists, any direct and / or subordinate personnel expenses will be negatively affected resulting in the potential for position layoffs. Additionally, any net revenues contributed to the university will essentially be eliminated should debt covenants not be met. This will have ripple effects throughout the institution as those funds are utilized for operational expenses, discretionary projects, and even student scholarships that feed a recruitment and retention strategy.
Privatized housing that offers apartment-style housing in most cases is more suited to accommodate the types of conditions for prevent the spread of COVID-19. Apartments with single bedrooms, bathrooms, and full kitchens can easily house two to four students each unlike large residence hall buildings that can house dozens to hundreds of students on a single floor. Universities that have P3 arrangements with affiliates with apartments are better positioned to permit students to remain with a certain level of social distancing that can not necessarily be accommodated elsewhere. Additionally, institutions that do not panic with occupancy management decisions and responsibly balance business operations with CDC guidelines will certainly weather the storm quicker.
Given the ability for the higher education industry overall to bounce back from the pandemic financial crisis, analysts are relatively confident that student housing will get back to normal from a cashflow, construction, and credit standpoint. P3 projects are typically positioned to have reserves that can help to alleviate short-term financial distress. Also, given that the universities will typically step in to help with a short-term emergency, the outlook is even more encouraging. Seeing the hope for a vaccine on the horizon, the stress on P3 communities is temporary and should not extend over the course of multiple years.
Helfrich Advisory Services, LLC is a boutique consultancy that specializes in college and university Housing Operations and Residence Life development, including the public-private partnership (P3) market. With 20-years of professional experience, my mission is to be a leading provider of affordable and practical solutions for the college and university student housing industry.
A very important concept that is inexorably tied to student housing financing is the Debt-Service Coverage Ratio or DSCR. Not only must college and university chief financial officers understand this, but all senior housing officers should also know what this is as well in order to fully appreciate the financial requirements and ramifications that come with borrowing money in order to develop, construct, and operate new student housing. This post will explain the basics behind the Debt-Service Coverage Ratio and how it impacts that day-to-day operations of managing student housing communities.
Investopedia defines the debt-service coverage ratio as follows: “…the debt-service coverage ratio (DSCR) is a measurement of the cash flow available to pay current debt obligations. The ratio states net operating income as a multiple of debt obligations due within one year, including interest, principal, sinking-fund and lease payments.”
While the definition may sound complicated, the DSCR is essentially an annual calculation that illustrates whether or not you have enough funds to cover the payments for the money you borrowed. When an institution borrows millions upon millions of dollars to construct new student housing, the lender needs reassurance that the project is financially healthy enough to make the required payments on the debt (i.e., debt-service). Just like any loan, there is the expectation that the money borrowed will be paid back by the agreed-upon terms (i.e., length of loan, interest, etc.) In this particular case, because it’s a real estate-based transaction, the lender uses a DSCR test as a means to set a benchmark for what is acceptable from a cash flow standpoint.
One important distinction, however, is that the lender expects a project to be more financially successful over simply just earning enough money to cover the debt payments. They want to see that a project is operating prudently so that there is enough money remaining over and above the annual debt payment amounts. A student housing project that is essentially living “paycheck-to-paycheck” (or not even to that level) is a huge financial risk, which lending institutions attempt to avoid. Having sufficient cash flow permits the ability to make the principal and interest payments, pay for operational costs (e.g., personnel, facilities maintenance, etc.), set aside funds for capital projects (i.e., building and property improvements), and still have some money remaining.
Therefore, a lender will typically require an annual debt-service coverage ratio (DSCR) of 1.20, which is generally a national industry standard. This means that, overall, the income must be 120% of what the annual debt service requirements are. This extra amount up-and-above the debt-service is essentially a buffer. Understand that the lender does not keep this extra amount, but simply uses this as a annual requirement to make sure that the administrators of the housing project are managing it soundly. The borrower must illustrate annually what the DSCR is via required financial statements and budgets provided to the lending institution.
The DSCR is calculated in two different steps: 1.) First, subtract the operating expenses from the revenue earned to obtain the Adjusted Income; and 2.) Second, divide the Adjusted Income by the Debt Service Requirements to calculate the Debt-Service Coverage Ratio (DSCR). Let’s look at a successful theoretical calculation from a fictional 400 bed student housing community. Please note these numbers are just for illustration’s sake:
Revenue Earned – Operating Expenses = Adjusted Income
$2,400,000 – $1,200,000 = $1,200,000 Adjusted Income
Adjusted Income ÷ Debt Service Requirements = Debt-Service Coverage Ratio
$1,200,000 ÷ $1,000,000 = 1.20 DSCR
As you can see, this fictional student housing community meets the 1.20 DSCR test. In this particular case, they are exactly meeting the mark for what is financially required.
Now let’s look at the same 400 bed, student housing community, but reflecting less income earned (i.e., lower student occupancy), but the same level of operating expenses:
Revenue Earned – Operating Expenses = Adjusted Income
$2,250,000 – $1,200,000 = $1,050,000 Adjusted Income
Adjusted Income ÷ Debt Service Requirements = Debt-Service Coverage Ratio
$1,050,000 ÷ $1,000,000 = 1.05 DSCR
As you can see in this example, they are clearly below the required 1.20 DSCR by $150,000. While they would still be able to make the debt service payments, they would still be scrutinized for not meeting the debt-service coverage ratio test. This can cause some proverbial alarms to sound as the DSCR test not being met could be symptomatic of one or a combination of many factors, including, but not limited to, poor asset management, new competitors in the local market, enrollment issues at the institution, and financial mismanagement. Because of this, the financiers can require various remedies to occur, including financial and management advisers to scrutinize all operations because they would not want this trend to continue into subsequent financial years.
In some dire situations, the DSCR can go below a 1.00, which essentially means that the housing community is not only unable to meet its debt obligations, but neither its budgeted operational expenses as well. At the end of the day, the only way to remedy a DSCR lower than a 1.20 is to increase revenue and / or decrease expenses. However, it’s important to understand that you cannot “cut” your way to financial success; you cannot make enough cuts to make up for the revenue that you are not earning. You must be able to earn enough revenue to meet the debt requirements. As with the case of the 1.05 DSCR example, attempting to cut $150,000 from the operational budget of a 400 bed community is going to next to impossible without significantly altering the services provided. This is why maintaining a strong occupancy is crucial. If, theoretically, the average fee for an academic year of housing costs $8,000 per student at that community, only 19 additional housing contracts would need to be obtained in order to meet the debt service requirements.
While there are others nuances and operational strategies in order to meet the debt-service coverage ratio, the key is making sure that your occupancy levels generate enough income to cover both the principal and interest payments as well as operational costs.
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In January 2018, I served as a faculty member for the ACUHO-I Senior Housing Officer (SHO) Institute in Pittsburgh, PA. I presented on student housing public private partnerships (P3) with a colleague from Brailsford & Dunlavey. I shared that I myself worked for over 10 years for a student housing industry firm at two public university P3 communities in order to gain much needed experience in budgeting, staff supervision, and capital project management. I was approached by a handful of the institute attendees who stated that they were being recruited to work for various privatized housing firms and wanted my perspective and some advice. The following information should prove insightful if you are debating a potential opportunity to work for a privatized, student housing firm.
PRIVATE MANAGEMENT COMPANIES – There are multiple student housing industry firms in the United States that develop, construct, own and / or manage college housing. Some of these firms are privately-owned while others are a public corporation whose shares are publicly-traded on the stock market. Some firms may own and manage private housing in your local off-campus community while others may directly own and / or operate student housing in a P3 relationship on (or near) a college campus. Like any organization, these firms have different histories, goals, priorities, leadership styles, and company cultures. *Note: Do not confuse privately-owned student housing communities near your campus with P3’s. There needs to be a direct public-private financial arrangement between the university and the private firm in order for it to be considered a P3. REIT (i.e., real estate investment trust) firms may own a property off-campus that is completely independent of your university.
ORGANIZATIONAL & STAFFING STRUCTURE – Each housing community (i.e., “property”) has its own staff, which typically includes a community manager, leasing and marketing staff, student account / financial staff, maintenance staff, and student staff. Student housing properties can be small or relatively large depending upon the college or university it serves. I managed two different, campus-affiliated apartment communities of 407 and 770 beds respectively, but I worked with colleagues who managed properties of 1,000+ beds. It should go without saying that the larger properties have a larger staff infrastructure.
The community manager (CM) is in charge of the property and supervises all of the staff. In some cases, the CM and / or maintenance manager (MM) may live on the property. In turn, a regional manager (RM) supervises a portfolio of properties and is the supervisor for those respective CM’s at those properties. The RM is typically a corporate office-based employee who is charged with staying in regular contact with their properties and visit at least once every quarter to make sure that everything is copacetic operationally. They will also interact with campus stakeholders if there is a P3 arrangement.
P3 properties that are operated by a private management company are financially self-supported in that the operational and capital costs come exclusively from the property’s bed revenue and reserves. The management company has a corporate office and supports all of its properties through various departments, such as accounting, human resources, marketing, and purchasing.
It is important to understand that a property CM is NOT the equivalent of a resident hall director or area coordinator. A CM is in charge of all aspects of property operations, including, but not limited to, leasing, rent collections, budget creation, vendor and utility payments, monthly income statement reviews, capital project management, and crisis response. Essentially, they would be the equivalent of a senior housing officer at a very small college. Some properties, however, do have a subordinate resident director that helps with student programming and CA / RA supervision.
REAL ESTATE VS. RESIDENCE LIFE – There is a very distinct difference between working for a student housing management firm and for a college or university residence life department. For a housing firm, the “bottom line” is paramount, particularly if it is publicly-traded with investors involved. At the end of the day, it is a business. In that regard, student learning outcomes, residential curricula, and student affairs are generally not a part of the day-to-day discussion. Operations mostly mirror what multifamily housing real estate management would look like in the rental apartment and townhouse market within the general community.
The vast majority of my community manager colleagues nationally did not have a background in higher education or student affairs and could not tell you what ACPA, ACUHO-I, and NASPA are nor the importance and applicability of student development research into their work. In some cases, there can be community managers who do not have a college education. This is not a criticism, this is simply an industry reality. Additionally, there is a semblance of programming, but overall it is not tied to student learning outcomes or assessment efforts. Programming is essentially a marketing tactic in order to entice students to renew their leases at the property for the following year.
COMPENSATION – It is crucial to understand and consider the different compensation structure that comes with working for a privatized student housing firm. Community managers will receive a base salary and typically the potential for a bonus.
Bonus Structure: Bonus programs can vary from firm to firm and can also differ if there is a P3 arrangement with a college or university. Community managers are normally paid quarterly incentives based upon predetermined objectives tied to revenue, expenses, and leasing efforts. While this may seem alien to a residence life professional, financially incentivizing performance is a standard practice in the real estate world. To give a theoretical example, there could be a $500 bonus for reaching a set goal of at least 98% of the budgeted revenue for a particular quarter. If the property revenue earnings are a total of $1,300,200 for a quarter and the budgeted amount for that time is $1,320,000 (i.e., 98.5%), you would earn the $500 because you would be above the 98% goal. If you were able to maintain that goal for every quarter, you would earn $2,000 (i.e, $500 x 4 quarters). There can be a combination of different bonus amounts for different goals so there is the possibility to earn a considerable aggregated bonus. However, bonuses are never guaranteed and can even be challenging to earn depending upon the financial health of the property and the team’s ability to keep beds filled and costs under control.
Benefits: Unlike working for a college or university directly, the benefits are going to differ in many regards. Educational benefits are generally NOT included for the employee and / or their spouse and dependent children. Also, any 401(k) retirement plans are also not going to be as generous either. For example, when I worked for a privatized housing firm, their match was 1.5% for the 3% that I contributed toward my retirement fund. Colleges and universities commonly match at a much higher rate, including above a 9% contribution where I currently work. In some cases, a firm may offer discounted company stock options that can be paid for by deductions from your paycheck. This can be a nice option, but there can be various restrictions set by the company related to how much you can purchase and the terms upon which you can sell that stock. Additionally, health care coverage is generally going to be more pricey than what is typically offered through colleges and universities.
Below is a compensation chart that illustrates the base salary, bonus, and total compensation for property community managers based upon the bed count of the property. Different firms are going to offer different compensation packages and they will vary dependent upon the size of the property. Obviously there are going to be differences based upon the cost of living of the area in which the job is located. This data came from the July / August 2017 Student Housing Business magazine (pp. 40 – 41).
PROFESSIONAL DEVELOPMENT – Professional development looks different than what you may have become accustomed to on campus, particularly with going to ACPA, ACUHO-I, NASPA or other Student Affairs-related conferences. Most of the training will be based on operations, including marketing, leasing, customer service, and facilities management. This can occur through webinars, online training modules, and even during company retreats held at locations near the corporate office. The training that I received working for a private student housing firm has been invaluable in my current role as a senior housing officer.
BOTTOM LINE ADVICE:
Look at the turnover history of the property staff and ask why the manager position is currently open? It is naive to think that you will be able to save the day for a property that has a history of challenges. Be careful that you are not walking into a nightmare situation you will regret. Granted, people leave for a variety of reasons, including being promoted. However, there is a significant amount of volatility among manager positions nationally so assess the culture of the company, the qualities and experience of the person that you would be reporting to, and be prepared to ask thoughtful and probing questions.
If it is too good to be true, it probably is. Be particularly careful when talking with “headhunters.” These are contracted recruiters who earn money by finding viable candidates for companies. I have been contacted numerous times by headhunters who were attempting to sell a position that I was simply not interested in. I also had one recruiter that was particularly pushy trying to get me to interview for a manager position at a property that was struggling in a saturated market. Don’t take the bait and inherit a problem that has little chance of being resolved.
As should be the case with any job offer, get it in clear writing, including any bonus programs offered. Never accept anything unless you have it in writing. A hiring manager (and / or their human resources department) should be transparent with the salary, benefits, and how bonuses are earned. Don’t get caught into “We’ll see how it goes!” or “There are bigger opportunities coming down the road!” red herring-type conversations that are empty promises. Know exactly what you are agreeing to. In the end, it should be a “win-win” relationship.
Once you are out, it can be hard to get back in. While P3’s and privatized housing firms are here to stay and an important part of the higher education landscape, there is still much suspicion and disdain among Student Affairs professionals regarding these companies. I certainly felt this among certain campus colleagues and oftentimes at many professional conferences across the country. I clearly remember one time interviewing for a senior housing officer position at a flagship institution and the hiring manager made the comment, “I have no clue why an institution would ever outsource their housing?!” Because of these types of negative opinions and stereotypes that exist about privatized housing firms, you can be easily dismissed over other candidates applying and interviewing for campus positions that have a traditional residence life path.
CONCLUSION – There are many considerations to make when deciding to work for any organization, including colleges and universities as well as privatized housing firms. You need to do your homework and find out as much as you can about the position. Talk to your colleagues and mentors about the opportunity as well as any current or former colleagues from that particular housing firm that you may know.
What questions do you have that I may help you with? Additionally, what advice do you have if you have transitioned from campus to the privatized housing world or vice versa. Leave your comments and questions below.